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What are directors’ duties in respect to climate change?

Opening the IODSA’s recent panel discussion on directors’ duties in respect to climate change, Sue Lund, a member of the IoDSA Sustainable Development Forum and a Non-Executive Director, highlighted the increasing realisation that directors need to factor climate change into their governance deliberations about strategy, risk management, products and services. “Directors’ duty of care for the current and long-term sustainability of their organisations should translate into measures that both mitigate and adapt to the material risks of climate change,” she said.

“The Commonwealth Climate and Law Initiative (CCLI), a research project focused on Australia, Canada, South Africa and the United Kingdom, has found that prevailing statutory and common (judge made) laws in these commonwealth jurisdictions already provide a legal basis for company directors and pension fund trustees to take account of climate change risks and societal responses to climate change,” says Christine Reddell, a member of the CCLI and Acting Programme Head: Corporate Accountability, at the Centre for Environmental Rights.

According to Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa, “section 76 of the Companies Act requires directors to act “in good faith” and in the “best interests of the company” and also to exercise the degree of skill and diligence that may be reasonably expected of a person “carrying out the same functions” and “having the general knowledge, skill and experience of that director”. Section 29 makes it a criminal offence to be party in any way to the production of financial statements knowing that those statements are “materially false or misleading”.

The King IV Report requires the integrated report to address “matters that could significantly affect the organisation’s ability to create value”. King IV explicitly links value creation to the six capitals, one of which is natural capital.

“These far-reaching provisions clearly suggest that directors’ fiduciary duties will be interpreted to encompass the risks that climate change poses for an organisation. Directors will be judged according to the reasonableness of their actions, which will involve an assessment of industry best practice, scientific consensus on climate change and the material risks that climate change poses to a business, and a consideration of what the boards of peer companies are doing,” explains Reddell.

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) categorises these risks into two major types:

Transition risks related to actions in response to the threat of climate change. For example, government plans to shut down coal-fired power stations, the declining cost of renewable energy and the emergence of electric vehicles could create significant risks to certain organisations’ business models.

Physical risks are the direct risks that altered or extreme climate patterns could have on the organisation, particularly as regards its supply chain. For example, the UK supermarket chain ASDA found that 95 percent of its fresh produce would be impacted by climate change.

Directors in certain industry sectors must also contend with liability risks. For example, there are already multiple instances of litigation against oil companies in the United States relating to climate change. New York City and some Californian communities have already brought billion-dollar cases against fossil-fuel companies relating to rising sea levels. According to The Guardian and DC.com It seems as though this kind of “lawfare” is likely to increase.

How should directors be responding? Ms Reddell advocates a common-sense, methodical approach:

Assess how climate change affects the company’s business model, both in terms of physical and transitional risks.

Develop plans to address and minimise these risks.

Report on these risks and the steps that the company is taking to address these risks.

It is also germane that section 7 of the Companies Act frames corporate purpose quite broadly to include the achievement of economic and social benefits.

“Corporates should not neglect their duty to take a public lead on this matter that affects society as a whole. The truth is that corporate South Africa is lagging behind international best practice when it comes to addressing the risks of climate change proactively, and in the process it risks damaging its reputation with stakeholders, who are increasingly concerned by these issues,” says Tracey Davies, Executive Director of Just Share. “There are many tools available to give directors guidance, and they should act proactively because there is little doubt that regulators will implement stricter legal frameworks otherwise.”

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The challenge of Climate Change presents Directors with a profound opportunity to examine how their companies create value. Are we stuck in a stale world-view where wealth-creation is proportional to the quantum of natural resources consumed, or are we alive to new possibilities? Climate change offers an unequaled opportunity for competitive advantage to companies that choose to lead.